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FDD Red Flag Checklist
Twelve checks, each mapped to the disclosure item where the answer lives. Work through them with the document open, mark anything that concerns you, and take the flagged list to your lawyer.
1. The initial franchise fee is stated in figures
Where to look: Item 5
Confirm the fee is a number, not a range that resolves later, and confirm what it buys. Check whether any part of it is refundable if you fail site approval.
2. Every recurring fee is listed and totalled
Where to look: Item 6
Add up the royalty, brand fund, technology, training, renewal and transfer fees yourself. Complaints on record describe royalty rates escalating from 3% to 14% across a term, so check whether your rate is fixed or stepped.
3. Fixed monthly charges are separated from percentage fees
Where to look: Item 6
Percentage fees fall when revenue falls; fixed charges do not. One documented complaint describes a $75 monthly technology charge billed on top of the royalty.
4. The total investment range covers your format and your market
Where to look: Item 7
Check which format the published range describes and whether your square footage sits inside it. Confirm what the low end excludes, especially working capital and landlord contributions.
5. Restricted sourcing is mapped, category by category
Where to look: Item 8
Establish which purchases must come from approved suppliers and whether the franchisor earns a rebate on them. Complaints describe approved-vendor pricing running 15% to 30% above open-market retail, and one franchisee documented an $80,000 gap on a single equipment package.
6. Equipment is checked separately from consumables
Where to look: Item 8
Play equipment is frequently less restricted than buyers assume, and it is usually the largest single line. If the category is open, quote it competitively before you commit.
7. The advertising fund has a written reporting obligation
Where to look: Item 11
Look for a clause requiring the franchisor to account for how the fund is spent. Complaints describe a 4.5% advertising fee where accounting was refused, and a 2% brand fund with no reporting at all.
8. Territory is defined, and the carve-outs are read
Where to look: Item 12
Establish whether the territory is exclusive, whether the franchisor can open a company-owned site inside it, and how online or delivery sales are treated.
9. Termination, transfer and liquidated damages are priced
Where to look: Item 17
Find the formula for early termination and calculate what it would cost you in year three. Check whether royalties continue if the location closes.
10. The financial performance representation is read for what it excludes
Where to look: Item 19
If there is no Item 19, the franchisor has made no financial claim at all. If there is one, establish whether it is revenue or profit, how many outlets reported, and whether they resemble your site.
11. Closures and terminations are read next to openings
Where to look: Item 20
Compare three years of openings against closures, terminations, non-renewals and transfers. A network churning at a similar rate to its growth is telling you something the marketing page is not.
12. Former franchisees have been contacted
Where to look: Item 20
Item 20 includes contact details for franchisees who left. Calling three of them is the single highest-value hour in this process.
Work through the twelve checks above to see a summary here.
This checklist is a preparation aid, not legal advice. Free copies of filed disclosure documents are available from the California, Indiana, Minnesota and Wisconsin state registries, listed in the indoor playground franchise guide.
